Stocks That Are Better Than Gold

It's tough to beat gold, isn't it? There's no better medal to win in the Olympics. For many people, there's no better component of jewelry. And when it comes to investing, quite a few folks think that other investments just aren't as safe or lucrative.

Well, that's just wrong. You might think of gold as safe-ish because it's a tangible item that exists in limited quantities, and because piles of gold bars in a vault somewhere won't be worth nothing anytime soon. Think again.

Stocks are tied to tangible things, too: actual bricks-and-mortar companies. Intuitive Surgical (Nasdaq: ISRG) stock is tied to robotic surgery machines and their accessories and equipment, as well as to the company's employees and research. United Parcel Service (NYSE: UPS) stock is tied to UPS buildings and UPS employees and lots of brown trucks and planes, among many other things. It's not likely that those kinds of assets will suddenly become worthless, or that the demand for energy and medications will shrivel up. Great companies tend to hold their value.

Gold's mixed resultsThose who think gold is a great investment need to think again. Sure, it can be one. And it has been one -- now and then. But over long periods, it doesn't have the best track record. Check out what $1 invested in various things between 1802 and 2006 would have grown to:

Investment

Real Return, in 204 Years

Dollar

$0.06

Gold

$1.95

T-bills

$301

Bonds

$1,083

Stocks

$755,163

Data: Jeremy Siegel, Stocks for the Long Run.

As you can tell from the dollar's return, those numbers are inflation-adjusted. A mere $100 investment would have netted you more than $75 million in stocks, while your money wouldn't even have doubled in value if you owned gold.

I know, none of us will be investing for 204 years. And gold has done well lately; it recently topped $1,000 per ounce. That's more than twice where it was five years ago. But check out these returns:

Between

Total Gain or Loss

1900 and 2000

1,372%

1900 and 1950

83%

1970 and 1980

1,607%

1980 and 1990

(38%)

1990 and 2000

(27%)

Data: National Mining Association.

Clearly, you can do rather poorly with gold over various long periods. The 1970-1980 period is legitimately exciting, with an annualized 33% gain. But even the overall 1,372% gain isn't so hot, since it's over 100 years. Annualized, that comes out to just 2.7%.

You can do betterSo go ahead and invest some of your money in gold if you really believe in it. Just know that with prices near all-time highs, it might be more likely to fall in value than to keep rising -- which is why it's good to seek out investments that seem cheap. But consider parking much of your money in places where it's most likely to grow well for you, such as stocks.

You could follow the advice of Warren Buffett and us at The Motley Fool and just opt for one or more simple index funds, which will track the overall stock markets for you. The Vanguard S&P 500 (VFINX) fund, for example, tracks 500 of America's biggest companies, including Walgreen (NYSE: WAG) , Schwab, and Freeport-McMoRan Copper & Gold (NYSE: FCX) .

If you want to aim even higher than that, you might add a handful of carefully selected stocks to your mix. One way to find some is to screen for them. Here, for example, are some potentially undervalued companies I found when I screened for market caps of $2 billion or more, price-to-earnings (P/E) ratios of 20 or less, three-year revenue growth rates of 10% or more, and four or five stars (out of five) in our CAPS community of investors:

An easier alternative is to let trusted resources point you to compelling contenders for your portfolio. Our Motley Fool Inside Value newsletter recommends two such stocks each month, as our team seeks out undervalued and temporarily unloved companies. I invite you to test-drive the service for free for a whole month. You'll be able to access every issue, and every one of the recommendations that have been topping the market handily for more than five years now.

This article was originally published Oct. 7, 2009. It has been updated.

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" invested in various things between 1802 and 2006 would have grown... "

"The official U.S. Government gold price has

changed only four times from 1792 to the present. Starting at $19.75 per troy ounce, raised to $20.67 in 1834, and $35 in 1934. In 1972, the price was raised to $38 and then to $42.22 in 1973. A two-tiered pricing system was created in 1968, and the market price for gold has been free to fluctuate: http://www.nma.org/pdf/gold/his_gold_prices.pdf"

"December 16, 2009 "

Today is December 16 2009. None of the stats listed in this "article" approach the current time. Was the writer just too lazy to bring the story up to date, just uncaring enough to leave the last nine years our of the story, or did the last nine years deflate the thesis of the story? Was it really that difficult to get golds performance from 2000 to 2009? Probably not, but why put forth an effort in a "free" story.

Wasn't the price of gold set more by government fiat than market conditions until 1968? Shouldn't this be part of the "story". Were prices on any other asset class listed in this "story" also set? The price of gold really did not move much until the 70's when market forces came into play.